Scott Grannis calculates just how much economic growth we’ve lost, for some unknown reason, over the course of the last six years.
Real GDP growth in the first quarter was weaker than expected (0.2% vs. 1.0%), but it wasn’t much of a surprise. It’s now been almost six years that the economy has managed only meager growthâ€”about 2 Â¼% per year on average. As a result, by my calculations, real GDP is a little over 10% below its long-term trend potential. That’s more than $2 trillion in lost income every year, and it’s getting worse. …
The chart above compares the level of real GDP to a long-term trend growth rate of 3.1%. This confirms once again that we are stuck in the slowest recovery ever. It’s my belief that the persistence of slow growth is largely the result of bad policies, though demographics likely plays a part too. Corporate profits have been very strong, but business investment has been very weak. Without new investment and risk-taking, we are not going to see a pickup in productivity which is, at the end of the day, what drives stronger growth and higher living standards. Investment has been weak probably because marginal tax rates and regulatory burdens have increased significantly in the past six years. In a sense, and expansion of government has suffocated the private sector.
Things are not going to change much for the better until policies become more pro-growth.
Whether the persistence of relatively weak growth is a reason for the Fed to continue to keep short-term interest rates extraordinarily low is one of the key questions of our time. I don’t see how low interest rates stimulate investment or enhance productivity. Only private initiatives can do that.
On the bright side, if policies do become more favorable, there is tremendous upside potential to look forward to. Closing the GDP gap would be nothing short of exhilarating.